GUT - Equity CEFs: The Irony Of The Cornerstone Funds CLM And CRF

2023-04-19 09:40:07 ET

Summary

• It wasn't that many years ago that I was the Cornerstone fund's biggest detractor, writing negative articles as far back as 2012.
• That was at a time when the Cornerstone funds traded at market price premiums ranging from as high as 80%, even while they were losing considerable NAV value each year.
• But a funny thing started happening in recent years. All of a sudden, the Cornerstone funds, CLM and CRF, started showing much better NAV performances.
• In fact, during a couple of those years, the NAV performances actually covered their annual 21% NAV distributions. That was about the time that I started to warm up to the funds.
• But the irony now is that just when the funds are starting to show much improved NAV performances, nobody seems to want to own or hold onto them anymore.

Let me first take you back to a 20-year Premium/Discount chart of the Cornerstone Strategic Value Fund ( CLM ) , $7.55 current market price , and the Cornerstone Total Return Fund ( CRF ) , $7.21 current market price, so that we can put in perspective where we are at currently.

Though the fund's inception dates go all the way back to 1987 for CLM and 1973 for CRF, it was during these salad years in which shareholders bid up the Cornerstone funds to ever higher premiums, seemingly without a care if they could actually cover those incredibly high distributions.

Here you can see that both funds peaked in valuations prior to the 2008 financial crisis and CRF actually hit over a 100% premium in March of 2007.

But what I think is interesting to observe is that if you look at the 2005 to 2012 year-over-year NAV declines below, and keep in mind this is after paying out 21% NAV distributions each year, the fund's largest premiums were mostly at a time when the funds were seeing the worst NAV erosions, shown in red below in the percent change year-over-year.

Note: CLM is shown in the table below but CRF was not materially different in its percentage changes year-over-year

Note: NAV prices are adjusted to include reverse splits in December of 2008 and in December of 2014

But look what happens in more recent years from say 2017 to today. Except for the bear market in 2022 which hit most everything, most of the years saw actual NAV increases (shown in green), even after paying out 21% in distributions.

So I ask you, why shouldn't investors be more inclined to hold onto CLM and CRF at what would be considered low premium valuations currently of around 13%, now that the NAV performances of CLM and CRF are so much better?

YTD, CLM's and CRF's NAVs are up 11.1% and 10.6% respectively on a total return basis, both of which are in the top 10 performances of all equity CEFs I follow (as of 4/14/2023):

Note: This is only a partial list of the roughly 100 equity CEFs I follow. Funds shown in green in the NAV Total Return column are beating the S&P 500 year-to-date

I started noticing this improvement in the Cornerstone fund's NAV performances back in 2018 and I even wrote this article in October of 2018, Equity CEFs: Are The Cornerstone Funds Now Better Buys Than Some Eaton Vance Funds?

And what's interesting about that 2018 article is that it sounds almost exactly like what the Cornerstone funds went through in 2022. That is, 2018 was also a year in which the Federal Reserve was raising rates and also reducing liquidity.

So if you believe that the Fed is just about done with raising rates, like it was in late 2018, then 2023 could follow in a similar path as in 2019 for the Cornerstone funds. In which case, for 2019, both funds saw positive NAV performances that year (see table above) and at market price, CLM returned + 23.6% and CRF returned + 21.7% :

And so far in 2023, CLM and CRF are on track to cover their distributions just like they did in 2019 too.

Now, I have no idea how the rest of the year unfolds and if there will be another black swan event, like COVID-19 in early 2020 which briefly knocked the Cornerstone funds down to wide discounts in March of that year (see Premium/Discount chart above), but by the end of 2021, CLM and CRF were back up to roughly 50% market price premiums.

All I can say is that the time to have gone negative on the Cornerstone funds was over a decade ago and clearly, Cornerstone management and the portfolio managers of CLM and CRF have learned a thing or two since then.

Probably the biggest thing they have learned is that if they want to have any chance of covering 21% NAV distributions, they have to position the portfolio more aggressively in stocks that can get them there. Over the last five years, that strategy has worked very well even if the funds suffered through the 2022 bear market with significant NAV erosion.

Still, CLM and CRF NAV's were down only about -15.5% last year, holding up far better than the S&P 500 ( SPY ) , which was down -18.2% in 2022 (dividends included) and the Nasdaq-100 ( QQQ ) , which was down -32.5% .

Yes, part of Cornerstone's strategy is to include Rights Offerings at a premium to NAV to help bolster the fund's asset base. And last year during CLM's and CRF's latest Rights Offering , Cornerstone was able to increase the subscription price for the offerings to 12% over NAV from 7% .

How high could Cornerstone possibly go to help supplement the fund's NAVs if necessary? Well, last year the Gabelli Utility Fund ( GUT ) , the latest fund to hit a 100% market price premium, did a Rights Offering at a stunning 35% over NAV and shareholders over-subscribed the offering .

Conclusion

I don't quite understand the negativity toward the Cornerstone funds now as they plumb market prices that are not far from their 52-week and multi-year lows going back to COVID-19.

Certainly, CLM and CRF's NAV performances in recent years would suggest that shareholders would be better off just holding onto their shares at these relatively modest 12% to 13% premiums and reinvesting at NAV instead of trying to time them.

But such are the whims of CEF shareholders that they can put one fund on a pedestal one year, like CRF in 2007 when it rose to a 100% premium, just like they have bid up GUT to a 100% premium today.

Though I don't expect the Cornerstone funds to rise back up to 50% market price premiums anytime soon, they certainly have a better reason to be at a higher premium than GUT shareholders right now, particularly at 19% market yields, over twice that of GUT's 8.6% market yield.

And that's the irony today that just when the Cornerstone funds have figured out how to actually cover those 21% NAV distributions while offering market yields that can be reinvested at NAV no matter what the premium, shareholders have decided that the Cornerstone fund are now better to trade at modest premiums than hold onto at 50%-plus premiums.

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